New Book Compares Chicago Suburbs’ Fiscal Management

February 20, 2012

Using 264 economically and socially diverse Chicago suburbs as a laboratory, a University of Illinois at Chicago researcher has analyzed how well local governments deliver services despite recession, political conflict and loss of corporate taxpayers.

In “Managing the Fiscal Metropolis” (Georgetown University Press, 2012), Rebecca Hendrick, associate professor of public administration, analyzed data from the late 1990s to 2006 to determine how financial decisions were made and financial practices instituted — and how they affected the suburbs’ condition.

“Even with half the U.S. population living in suburbs, and despite the critical involvement of local government in our daily lives, very few studies have been done of how suburbs manage their fiscal condition,” Hendrick said.

She found that some governments were almost insolvent, while others had few fiscal problems even during the 2001 recession. Hendrick said that financial management differed in many ways between politically and professionally driven governments, and that competition among local governments affects financial decisions.

“Compared to other metropolitan regions, local government in the Chicago region is highly fragmented, and population is highly stratified by jurisdiction, creating unique local governments with divergent interests,” she said. “Having many diversified local governments increases the opportunity for collaboration, but it also fosters competition and makes collaboration more costly.”

As an example of harmful “yardstick competition,” she points to the toxic water in Crestwood, Ill. that came to light last year.

“The Illinois EPA found that Crestwood had knowingly supplemented their water supply with highly toxic water from a contaminated well for more than 20 years to keep water charges and taxes low compared to other governments. This demonstrates the race to the bottom among some municipalities that set taxes and water rates too low,” Hendrick said.

She also found that the ways suburbs handle financial problems differ little from those of governments during earlier times of fiscal stress.

“Governments have always used their fund balances, or saved surplus revenues, to cover for an unexpected decline in revenues or increase in expenditures and to buy time to address longer-term fiscal threats,” Hendrick said.

Fund balances also allow suburbs to take advantage of grants that require the suburb to match funds, she said, but many suburban governments don’t maintain reserves. “Rather, they borrow to cover short-term deficits and to produce matching funds. These governments tend to be governed more politically than professionally,” she said.

For suburbs to improve both services and finances, Hendrick recommends:

Imposing criteria for state grants that reward cost-efficient collaborations between governments, and between governments and nonprofits

Sharing of local and state sales tax revenue according to need, not strictly point-of-sale

Distributing state income tax by need as well as population, as is done for school districts

Minimizing conflict between elected officials and politically appointed department heads, especially when there is a turnover of council members or mayor

Hendrick says many municipal governments may never completely rebound from the Great Recession’s impact on property taxes.

“It will be interesting to see whether collaborative arrangements or even consolidation of governments becomes more the norm than the exception in this region,” she said.